@the Market: Markets Need a Time Out
The S&P 500 Index has gone up eight straight days. The other averages have done the same thing. That hasn't happened since 2013. It's time for a break.
It appears that stocks are in "melt-up" mode. That's a term we financial geeks use to describe an unrelenting rise in equity prices. Consider it an investor stampede where the fear of missing out on even higher prices creates a buying frenzy.
There are some fundamental reasons for the market's rise. The economy appears to be chugging along. Interest rates remain low while inflation continues to bump along the bottom. This Friday's payroll numbers were a disappointment to most. For the first time since 2010, the U.S. economy lost jobs in September. While the unemployment rate dropped to 4.2 percent, America also lost 33,000 jobs. It doesn't take rocket science to figure out why. Remember Hurricanes Harvey and Irma? Of course the nation lost jobs as whole businesses were flooded or blown away in sections of the country.
But at the same time, readers know that what I look at in each report is wage growth. That tells me how American workers are doing and where spending is going in the months ahead. And remember, consumer spending, which accounts for 70 percent of GDP, is key to the future health of the economy. Good news — wages jumped sharply higher last month, rising 0.5 percent over the August numbers and 2.9 percent over the prior year.
But the real reason investors are celebrating was the Republican-controlled House move to pass its 2018 budget resolution. In a 219-206 vote, the House of Representatives approved a budget resolution that sets up a process for shielding the GOP tax bill from a filibuster in the Senate. As such, it moves the president's tax reform proposal that much closer to passage this year. That gave Wall Street a new jolt of energy.
In addition, we are once again heading into earnings season starting next week. Remember that first-quarter earnings grew by 14 percent followed by a 9 percent gain in the second quarter. Third quarter earnings forecasts are all over the place: anywhere from a 4 percent gain to over 10 percent.
In my opinion, earnings are what really drive the stock market in the long term. The better they are, the higher the market will go. As such, earnings results could be a critical element in where the stock market goes from here.
If we do get double digit growth in earnings and at the same time it appears that tax reform will actually happen this year, then the markets will likely experience a "blow-off" surge that could be really spectacular. On the other hand, if earnings are just so-so, expect the market to regroup. Notice I didn't say fall precipitously.
The risk/reward is still with the bulls in my opinion. Even if earnings disappoint, a decline would simply be another excuse to buy the dip. So given the odds of a minor (5-7 percent pullback) and a blow-off rally that could extend for another few months, does it make sense to sell?
@theMarket: NK Missile Dud on Wall Street
The North Korean boy who cried wolf is alive and well, but seems to have less and less impact on financial markets. Kim Jong Un's minions launched another missile over Japan on Thursday night and the markets simply yawned.
Geopolitics are always a risk for the financial markets. For one thing, they are by definition unpredictable. Rarely do the antagonists worry about the economic and financial ramifications of their moves. As such, markets react quickly, but usually the impact only lasts for a short period of time.
It seems that even our tweet-happy president is learning that, in this case, Kim Jong Un, the boy in the wolf's mask, has a bark that is far worse than his bite. Have you noticed that none of those missiles hit anything? That is not by accident. Unlike the majority of Americans, I do not think Kim is either a madmen or stupid. Far from it. I believe he is a calculating despot whose single-minded purpose is to attain a seat at the table among the world's nuclear power brokers.
His missile tests are intended to do just that. He needs to demonstrate to the world that not only does he have the capability to manufacture nuclear bombs, but also the ability to deliver them in a consistent manner. His scientists and military, aided and abetted by technology from other nations, will continue firing missiles into the sea and testing nuclear devices underground
until the world is convinced that he can do it. Only then, with a seat at the table as an equal, will Kim be willing to negotiate.
While North Korea and a bomb blast on the London subway occupy investors today, what moves markets in the medium and long-term are economics, tax reform (think cuts) and to a lesser extent, the recovery of weather-torn Texas and Florida. The good news is, now that the floods and rain have subsided, investors are trying to figure out what the aftermath of Irma and Harvey will have on the economy.
Clearly, $300 billion in damages will take a dent out of the economic growth rate over the coming months. However, the need to rebuild, with all that entails will provide a boost to GDP down the road. So, as analysts are busy crunching those numbers, a new atmosphere of bipartisanship is giving hope to investors that something — anything — might be done by our lawmakers before the end of the year.
Granted, Donald Trump, the self-professed deal maker par excellence, has been a bit slow on the uptake, he is finally realizing that there are two parties in Congress. Since he has not been able to make much headway with the various splinter groups that is called the Republican Party, he has turned to the Democrats to further his agenda.
And his present agenda is tax reform. Readers are aware that I personally do not hold out much hope for the long-promised, much-needed (but never enacted) reform of our byzantine tax system. A far easier proposition is to cut taxes. After all, our politicians have a long history of cutting taxes one year and raising them the next. Tax cuts won't convince corporations to invest or spend more. The economy won't take off because of them either, think of it as an election bribe, most likely enacted just before the mid-term elections next year.
As for the markets, the good news outweighs the bad, thus the minor new highs we are enjoying in September. I suspect we will inch up a little further in the short term but markets will continue to remain volatile for the remainder of the month. Keep invested.
@theMarket: Markets Brace for the Weekend
Usually, the weekend is a time when traders try to relax, reduce stress, and prepare for the coming week's markets. This weekend will be an exception to that rule. Just about everyone is focused on the latest news of Hurricane Irma's landfall in southern Florida tomorrow and into Sunday.
Over in Southeast Asia, analysts are also expecting North Korea to fire off yet another missile. Exactly where and when is up in the air.
As if that were not enough, an earthquake and Hurricane Jose both hit Mexico simultaneously last night causing quite a lot of damage. Investors have no idea what economic impact these natural disasters will have on the North American economy. As for Kim Jong Un, there is always the possibility that an "accident" could happen, setting off World War III.
So it is not surprising that the stock market has gone nowhere this week. About the best you can say was that the averages were mixed. The only good news seemed to be that the debt limit was passed as part of a bill that provided the first flood relief money to beleaguered Houston. That surprised many, since the deal was forged by President Trump and the Democratic leadership.
Facing a protracted battle within his own party, Trump reached across the aisle for the first time in his presidency. The results were surprisingly quick and altogether positive. Of course, the rank and file within the Republican Party were at first surprised, and then angry, since they were gearing up for a protracted struggle within their own party. The various GOP splinter groups were planning on adding spending cuts, various pet pork-barrel projects, etc. to both the Harvey Relief aid, as well as the debt ceiling.
The markets took this sudden about-face by Trump positively. It helped support the markets in the face of all the other bad news. One could even hope that the president might resort to even more bipartisan help to further his agenda in the future. That could loosen the political logjam that has prevented any substantive legislation from passing Congress in the first eight
months of his term.
In a media atmosphere that wherever you look the first thing you see is the swirling visual of this "storm of the century" approaching American soil, it is understandable to be concerned, fearful, even panicked. Let's hope that like so many weather-related crises that the media hypes, this one won't be as damaging as they predict. If it turns out to be so, you could
even see stocks rally.
September is certainly providing the increase in volatility that it is known for. I guess the best that can be said for the markets so far is that in the face of overwhelming negatives, stocks have hung in there. That is a testimony to the underlying strength and conviction among investors that the future continues to look bright. It is why any pullback in the market, in my opinion, will be a single-digit decline at best and nothing that should concern you.
@themarket: Global Interest Rates Rise, Global Stocks Fall
It is something we really haven't seen in quite some time. Back in the day, before the financial crisis, interest rates and stocks most often moved in opposite directions. This week investors got a taste of what the future might hold.
U.S Treasury yields on the 10-year note (the benchmark average) ticked up to 2.39 percent at one point. Across the pond, the German Bund (their benchmark) rose .5 percent. Those were big moves in the debt world. Why are interest rates on the rise all of a sudden after years of declines?
Some would say it just had to happen. Global central bank policy has just been too loose for too long. I don't necessarily agree with that view, but at the same time, our own Fed has given the markets ample warning that the time to tighten is upon us.
But before we bid adieu to their past policies, let's give all those central bankers a hand. In the absence of any fiscal help from the world's politicians, these heroes single-handedly not only pulled us away from the brink, but have guided global economies to their present state of growth. What is different this week from other weeks is the perception among investors that other central banks may now be following our lead.
Throughout the first half of the year, I wrote that it was not Trump and his promises, but low interest rates, a growing economy, and declining unemployment that was supporting the stock market. I also warned that the real arbiter of further equity gains would be the Fed and how they implemented their new tighter, monetary policy.
So far, their actions have been transparent, moderate and, to the best of their ability, telegraphed to the markets well ahead of any future moves. The problem now is that if (and right now, it is only an if) other central banks begin to tighten, than no one knows what will happen.
How will various central banks coordinate policies? What will tighter monetary policy overseas mean for our bond market yields? Will Japan start to tighten as well, and if so, what will that mean for both U.S. and European interest rates? One thing we do know is that today's traders are quick to pull the trigger before taking the time to see what transpires.
Stock indexes hit six-week lows this week. That doesn't mean much in the grand scheme of things. Granted, we hit my target on the S&P 500 Index at 2,444 weeks ago but that doesn't mean I called a "top." We could still start to rally back next week when this holiday-shortened work week is over. In the summer, when participants are on vacation and volumes are low, it is easy to manipulate the markets.
Technically, we had better rally hard in the coming week because we are hovering just over support for the S&P 500 index at 2,414. The action of technology stocks is also bothering me. It is this sector that has led the market up and it feels like we still have more to go on the downside.
But so what; I and everyone else have been waiting for a sharp, shallow sell-off of the 5-6 percent variety so let it happen. July would be an auspicious months for that. As for your portfolios, do nothing right now. If this is truly the beginning of that downdraft, I see 2,345 as the first support for the index. That would bring us down to a 4 percent decline or so. Big deal!
@theMarket: Markets in Pullback Mode
Technology stocks continued to consolidate while the Dow made new highs and the S&P 500 Index hovered just below historical highs. Throw in the fact that the markets are notoriously slow and biased to the downside during the summer months, and you have a recipe for further consolidation.
That does not necessarily mean that we will see some sharp and painful correction in stocks. My regular readers understand that the averages could simply move sideways for a month or two before resuming their upward climb. However, within those averages, individual stocks and sectors could experience much deeper declines.
Take the present decline in the technology-laden NASDAQ market, or the carnage investors have experienced in energy shares. Tech stocks are presently down almost 3 percent from last week's high, although several individual shares are down a great deal more than that. At some point, these pullbacks will have run their course.
The oil patch has seen even greater declines as the price of oil plummets, then spikes, only to fall again. But once these areas find a bottom, something else — financials, health care, utilities, etc. — could be the next group to sell off. It will depend on their price level in relation to the rest of the market.
This is the concept of "rotation," which I explained in last week's column. So while the overall averages may show little change from month-to- month, certain areas could experience substantial declines. Small cap stocks have done little all year while many other sectors have risen in price. Some traders are betting that money coming out of technology could conceivably end up in the small-cap Russell 2000 Index and financial sector.
Financials have been held back this year because of the onerous rules and regulations that encumber their business as well as the continued historically low level of interest rates. This could be another area where investors may perceive "value." Some investors have been buying the banks, expecting the beginning of a Fed-inspired, interest rate rise will help their profits.
That may not be too far off, given the actions of the central bank this week. They hiked short-term rates higher by a quarter of one percent (expected) but also revealed additional details on their plan to reduce their balance sheet by selling back trillions of dollars in bonds over the next four years or so. You should simply understand this as another form of tightening monetary policy. A rule of thumb would be $30 billion in balance sheet reduction would be roughly equal to a quarter-percent rise in the Fed Funds rate.
While no one is blaming the Fed for tightening monetary policy too soon or too fast, the fact remains that Fed Chairwoman Janet Yellen and her 12 apostles are no longer expanding monetary policy. The punch bowl of loose money is drying up, at least here in America. The hope is that the economy and the private sector are strong enough to takeover and the Fed can get back to its normal duties of playing the top cop in relation to inflation and employment.